To offset some of the risks associated with market volatility, commodities sellers sometimes enter into trading agreements with buyers of commodities. The agreements often set prices based on futures, and may include quantity requirements, price floors, and price ceilings. With a marketing agreement, the seller may achieve some level of comfort in his ability to market commodities at a reasonable price. The agreement thereby reduces the seller's vulnerability to price risks that can cut into profits. In turn, the buyer achieves access to a predetermined quantity of the commodity.
Many buyers hedge the implicit risks associated with the price obligations in the agreement. In general, a buyer's “hedging” involves trading to protect the buyer against the risk of an unfavorable price change from the time the marketing agreement is made to the time that the commodities are actually purchased. Hedging may involve trading futures contracts and/or options on futures contracts. Options may be purchased from a derivatives hedging products (DHP) supplier or from another options writer.